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Longfor Properties（0960.HK）——Regional leading property developer

Friday, November 6, 2009

4863

Longfor Properties(960)

Recommendation on 6 November 2009
Recommendation	Subscription
Target Price	$8.750

Weekly Special - 3606 Fuyao Glass

Summary

Longfor properties is to raise 1billion stocks at HK$6.06-7.1 in public, and the capital raised may be as high as HK$6.06-7.1 billion, which could rank first for IPO property projects in this year. By the “selected regional focus” strategy, the Company has maintained high growth. It has not only rich land bank, but also faces roomy developing challenge because of the more adequate land bank in Western cities. We expect its net profit in FY2009 and FY2010 will be HK$1.645billion and HK$1.767billion respectively. Based on 18xP/E of 2010 EPS, 12ms TP will be HK$8.75, with Subscription rating.

Rich land bank available to support growth

Longfor Properties is engaged in the property development, property investment and property management business in China. It has won leading status in the main developing cities, first in Chongqing, second and third in Beijing and Chengdu respectively, based on the revenues in FY08, which benefit from the “selected regional focus” strategy. Nowadays the Company is inclined to develop high-end residential projects.

According to the company, it has 35 projects in different stage of development over 19million sq.m. in 8 cities domestically up till August this year.

Although some domestic companies own land banks enough for above ten years development, Longfor, however, has land available only for 5-6 years development, a level that is reasonable and enough for its sustainable growth. Presently, the domestic land markets face serious speculative mood. From a report by DTZ, domestic purchased land space reached 3.13 billion sq.m. between 1998 and 2008. By the end of 2008, only 1.94 billion sq.m. land have been developed, presenting nearly 40% land are held up by developers. What's more, the land prices have also ascended too fast and there is withdrawing risk for lands undeveloped over two years. Therefore, the controlling policies may be inevitable, which can bring better land-purchasing time for real developers like Longfor Properties.

More adequate land bank in Western will bring roomy developing challenge

The land bank of Longfor Properties is a little diversified, but the focus strategy is more obvious. First, its property type is all-sided, but the residential type takes the main share, which are inclined to concentrate on the high-end property.

Second lies in the location. Besides the Southern China, its land banks scatter in different region, of which the second-tier cities are the focal points. Conversely, the land bank in the first-tier cities like Beijing and Shanghai only accounts for 13%. Furthermore, the land bank now relies heavily upon the Western cities such as Chongqing, Chengdu and Xian, whose land bank take a 73% share.

After the remittent global financial crisis, the structure improvement may be expected to put forward for the domestic economy development, And the industrialization and urbanization may speed up in the central and western cities, then provide roomy development for regional property sector. Regarding the bearing capacity for the property prices, we can find the western cities face more suitable developing situation, especially for Chongqing city.

High performance growth in 1H09

Since 2Q09 the property market has become warmer, the single month sales for Longfor Properties keep above RMB 2 billion, benefiting from its “selected regional focus” strategy. Its sales from Chongqing Longhu and Beijing Longhu both break through RMB 3 billion and set a record in 1H09, meanwhile nearly RMB 2 billion for Chengdu Longhu. Benefiting from hot sales of Qujiang Glory and Beijing Rose and Gingko Villa projects, the sales of Xian Longhu and Shanghai Longhu added up to RMB 1.5 billion. In sum, the Company realized the sales nearly RMB 9.5 billion in 1H09, with GFA sold close to 1.2 million sq.m. and units sold above 10 thousand. All those indexes have recorded the best in the same period of past 15 years. It is announced that the projects and units put forward in 2H09 will be higher than that in 2H08 and 1H09. Longfor Properties may be enlisted in developers over 10 billion sales in consecutive three years. We believe the sales of the Company will be assured in the coming two years.

Regarding the profitability, because the Beijing projects are booked and warmer real estate market, with focusing on high-end resedential projects, whose sales price is higher than the peer average, the sales price of the Vompany in 1H09 doubled, making the gross margin rallying 5.5pts to 31.31%. In sum, the Company's revenue increased 160%, and net profit rocketed 640% to RMB 1.456 billion in 1H09. In the coming two years, taking consideration of inflation expectation and possible RMB appreciation, we expect the property sales price will maintain at a high level, with the gross margin holding above 30%.

The financial structure may be improved greatly

As at the end of April, the company's banking debt totals RMB12.5 billion among which RMB7.6 billion will mature within one year. Meanwhile, its asset-liability ratio is as high as 84%, showing a heavy debt burden. After the funding, we estimate the asset-liability ratio will decline over 10 pts, and the short-term liquidity will also improve, with cash and cash equivalents nearly close to the banking debt. Therefore, its capital pressure will be relieved, which can benefit the Company's projects developing and future growth. From its announcement, only 5% raised capital will be replenished for the operating cash flow, others will be used for developing projects and purchasing land bank.

Risks in real estate industry

Though positive to the long term outlook in the property sector, we still see serious structure conflicts that high price of property is unsustainable once urbanization suspends temporally by policy diverging. The main reason roots in the unreasonable distribution in China and investment misleading in real estate market. For the Housing Price-to-Income Ratio and the rental return, most of Chinese cities have outrun the international standard, especially for those of the first-tier cities. In a short-term view, the preferential policies put forward in FY08 may be ceased, like the contract tax and sales tax abatement and etc, which will negatively influenced on the development of the real estate sector.

Domestic real estate industry is positive in a long term, we think, yet with a great probability of bubble bursting in middle term, and rested on money and industry policy from a short term view. Given the continuous effect of global crisis, we think the loose monetary policy will last and real estate will get the support of policy with most probably as a keeping stable industry. So the risk of fast bubble squeezing is small during the foreseeable 1-2 years.

Other risks

Tight policy of money and industry is earlier than expected.

Unavailable to obtain land as planned.

Global economy may bottom again and go against the investment environment.

Valuation is attractive

Given the government's attitude of keeping stable in real estate market within two years as well as inflation expectation and possible RMB appreciation, plus with rich projects of being built, we forecast the company will record revenues of RMB 9.9 billion and RMB11.4billion in 2009 and 2011 respectively, growth of 122% and 15% y/y; net profit of RMB1.645billion and RMB 1.767billion; EPS of RMB0.40 and RMB 0.43 and net asset per share of RMB 2.53 in 2010.

Our valuation is based on P/E because the Company's growth is foreseeable. Considering the global 100 largest market capitalization property companies and the homothetic capitalization property companies like Longfor Properties, the median P/E level is between 20-30X. Only the Japanese valuation is as low as 15-17X. Given the rich land bank and district advantage, we conservatively give it 18x PE for 2010 EPS with 12ms TP of HK$8.75, rating Subscription.

Earning Forecast

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